Quest is considering a change in its cash-only sales policy. The new terms of sale would be net one month. The required return is .98 percent per month. Currently, the firm sells 420 units per month at $736 per unit. Under the new policy, the firm expects sales of 475 units also at $736 per unit. The variable cost per unit is $426. What is the NPV of switching?
A) $1,228,750
B) $1,407,246
C) $1,335,021
D) $1,238,250
E) $1,056,784

Question

Quizplus · Accepted Answer

To calculate the NPV of switching to the new sales policy, we first determine the incremental cash flows from the change in policy. The additional units sold per month due to the new policy are 475 - 420 = 55 units. The additional revenue per month is 55 units * $736 = $40,480. The additional variable cost is 55 units * $426 = $23,430. Thus, the additional monthly profit before considering the cost of financing is $40,480 - $23,430 = $17,050.To find the NPV, we need to discount the additional monthly profit by the required return of 0.98% per month. The NPV formula for an infinite series of cash flows is NPV = Cash Flow per Period / Monthly Discount Rate. Here, the monthly discount rate is 0.98%, or 0.0098 in decimal form.NPV = $17,050 / 0.0098 = $1,739,795.92However, none of the provided options match this calculation. The mistake in the calculation process is not accounting for the correct approach to calculate the NPV of switching policies, which involves considering the net benefit of the policy change and the appropriate discounting method. Given the options and the typical approach to such a problem, it seems there might have been a misunderstanding in the calculation process or the interpretation of the options. Given the discrepancy, the correct approach involves calculating the incremental cash flows correctly and then applying the appropriate discount rate to find the NPV. However, without the exact formula or method that leads to one of the provided options, it's challenging to identify the correct answer based on standard NPV calculation methods. The explanation provided was meant to illustrate a typical approach to calculating NPV, but it appears there may have been an error in the calculation or an assumption that does not align with the options provided. Therefore, the correct answer should be based on recalculating the incremental benefits and costs correctly and applying the monthly discount rate, but the provided calculation does not match the options, indicating a need for reevaluation of the calculation steps or assumptions.

Quest Is Considering a Change in Its Cash-Only Sales Policy